Natural gas ends lower for the session and the week

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SAN FRANCISCO (CBS.MW) -- Oil futures closed out the week with a 3 percent loss as traders proved wary of any fresh developments regarding Iraqi production ahead of next week's OPEC meeting.

Crude for September delivery closed at $30.17 a barrel on the New York Mercantile Exchange -- that's down 86 cents for the week and down 5 cents for the session.

August heating oil fell 0.04 cent to 77.69 cents a gallon while August unleaded gasoline closed at 89.93 cents a gallon, up 0.1 cent.

"Oil traders are focused on the upcoming OPEC meeting and the developments in Iraq since the reported deaths of Saddam's sons," said John Person, head financial analyst at Infinity Brokerage Services.

The sooner the Iraqi people believe Saddam's regime is quashed once and for all, the "better the cooperation and speed in which Iraq can be can be a contender as a top oil supplier again," he said.

Still, "no one is really quite certain if there will be any reprisals from militant rebels in Iraq over the killings, and how it may affect supply and production proceedings in that country," he said. As a result, traders are attempting to cut back on their risk exposure, he said.

Once Iraq starts to produce and supply oil on the world market, Person expects crude prices to move back to the $25-per-barrel range -- a potential pullback of some 17 percent.

"I would say we're closer to that now than ... two weeks ago, due to the announcement of the deaths of Saddam's sons," he said.

Fimat USA analyst Michael Fitzpatrick said Iraq plans to increase exports from its southern oil fields to 645,000 barrels per day in August, up from 450,000 barrels per day in July.

But that's "still only a third of pre-war export volumes, and (Iraq) still has no plans to resume sales from its northern Kirkuk fields," he said.

OPEC's likely inaction

The current pricing backdrop and persistent questions about Iraqi crude will "allow OPEC to leave output levels unchanged next week," Fitzpatrick asserted.

OPEC members meet Thursday in Vienna to discuss Iraq's efforts to lift oil output to prewar levels of around 2.5 million barrels per day. OPEC's production quota currently stands at 25.4 million barrels per day, but prices for the cartel's basket of seven types of crude oil have been trading at the high-end of the cartel's $22-to-$28 target price band.

Phil Flynn, a senior analyst at Alaron Trading in Chicago, said OPEC's biggest concern is "when Iraq is going to become a big (oil) player again."

Cartel members are happy with prices around $30 a barrel and while they're unlikely to make any changes to the production quota, they'll probably see continued compliance with it, he said.

Normally, OPEC would talk about increasing production as the market heads into winter, he said.

Supply woes

Crude supplies in the U.S. remain close to a 27-year low, but inventories of distillates and gasoline haven't reached critical levels yet, Fitzpatrick said.

However, "with eager competitors waiting to take away market share, especially at these prices, OPEC will find it increasingly difficult to maneuver," he said.

The latest updates on U.S. petroleum supplies issued on Wednesday revealed a second week of crude inventory declines.

Early Wednesday, the Energy Department reported a 2.3 million-barrel fall in crude inventories for the week ended July 18. Total inventories of 276.3 million barrels are 11 percent below that of a year ago.

The American Petroleum Institute, however, said supplies fell by only 700,000 barrels in the latest week to stand at 277 million barrels.

The supply declines were attributed to Hurricane Claudette's disruptions to oil production and shipments in the Gulf of Mexico.

Gasoline inventories also fell, but distillate stocks climbed, the Energy Department and API data showed. See full story.

Supply data due next week will take on added importance since there were no disruptions in the supply lines stemming from weather conditions, Infinity's Person noted.

Natural gas down for the week

Also on Nymex, August natural gas closed at $4.706 per million British thermal units, down 2.5 cents for the session after a week dominated by losses. Prices ended last week at $5.022.

Hurricane Claudette failed to make much of impact on natural-gas production and shipments in the Gulf of Mexico last week and there are no threats to output from current storms.

Supplies are gradually climbing. The Energy Department said early Thursday that natural-gas supplies in storage increased 83 billion cubic feet to stand at 1.949 trillion cubic feet for the week ended July 18.

Total supplies are 537 billion cubic feet less than the level of a year ago and 286 billion cubic feet below the five-year average, the government said.

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About the Author

Myra P. Saefong, assistant global markets editor, has covered the commodities sector for MarketWatch for 20 years. She has spent the bulk of her years at the company writing the daily Futures Movers and Metals Stocks columns and has been writing the weekly Commodities Corner column since 2005.

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